With Stamp Duty holidays and low interest rates, now could be a great time to invest in buy to let property. However, with so much uncertainty in the economy, is it really a good idea?
Here’s how to decide if you should invest in buy to let property in 2020.
- Do You Qualify for a Buy to Let Mortgage?
- Low Mortgage Rates Pros and Cons
- Stamp Duty Holiday Rules
- Can You Find Tenants?
- The Financial Risks of Becoming a Landlord
- Potential Returns on Your Buy to Let Investment
- More Property Tips
Before you start looking at investing in a property to rent out, make sure you’re eligible for the financing available.
If you have cash stashed away to buy a property outright, that’s great! The returns on renting it out versus keeping that money in the bank will be huge. Interest rates on savings are beyond shocking right now, so a cash investment in property could be a great way to invest.
However, if you only have enough saved for a deposit, make sure you qualify for a buy to let mortgage before you start looking for property. You’ll need to:
- Have at least a 25% deposit
- Already own a property (you can still have a mortgage on that one, too)
- Show that you don’t intend to live in the property yourself
- Earn more than £25,000 a year (for most mortgages)
- Know expected rental income (lenders typically need repayments to be no higher than two thirds of the monthly rental income)
Ticking all of those boxes mean you’re eligible for a buy to let mortgage!
Buy to Let mortgages come in different types, such as trackers and fixed periods. The deals available differ to those on residential mortgages, because being a landlord is a commercial venture.
However, the majority of these mortgages are interest-only. That means you’ll pay only the interest amount each month, and the full lump sum of the mortgage at the end of the term. With such low interest rates, that’s an excellent deal!
Just remember that you’ll need to put aside the rental income each month to save for the final repayment, though. Interest rates on savings are appalling, but you need to ensure you can pay back th mortgage at the end. You can, however, lock your cash away for longer periods – so take advantage of the (ever-so-slightly) higher interest rates on fixed term savings accounts.
Cons of low rates
With interest rates at an historic low, getting a mortgage now could be a great deal – IF you get the right one. A tracker mortgage, for example, might suddenly rocket if interest rates rise again.
You might opt for a fixed-term deal. This means you pay a set interest rate for an agreed period – usually two or five years – and then pay a much higher rate after that term is up. That’s usually when people opt to remortgage – but first, you need to make sure you won’t be hit with huge early repayment fees.
It’s tricky to know right now if you should fix your rate for a longer period – say ten years – because interest rates are so low. They could dip even further, meaning you’re paying over the odds.
However, they can also rise – so you’d be set on a great deal if rates rocket.
Think about what you could afford to repay each month if your rental property was empty. This should be your limit when planning to apply for a mortgage – just in case you can’t find tenants immediately.
The Stamp Duty Holiday applies mainly to residential properties that are a primary residence. Instead of the usual tapered tax, all primary residences up to £500,000 sale price won’t have any Stamp Duty Land Tax due. This is temporary and ends 1st April 2021.
For buy to let properties, there is some comfort for those seeking a higher value property. The Stamp Duty Holiday means you’ll pay 3% tax on your property purchase up to £500,000. This is a huge saving, still: normally, you’d pay 5% on property value between £125,001-£250,000, and 8% on the value between £250,001 – £500,000.
The property tax holidays vary between countries in the UK. Scotland, for example, has raised the Land and Buildings Transaction Tax to properties over £250,000 until 31st March 2021.
Buying a property to rent out relies on finding tenants! Make sure the area you’re buying in has a high chance of being filled. Property websites like Zoopla and Rightmove often have information like this on property listings. An even split of homeowners/rentals is your best bet: too many rentals means more competition for the market. Too many homeowners suggests it’s an area people prefer to buy in, rather than rent.
Look around at similar properties and their advertised rent. This gives you an idea of what you can charge for the property, and whether that would be a good return on your investment.
Check for amenities and local jobs, too. For example, areas near hospitals, large schools or universities, and near main transport hubs are more likely to fill quickly with tenants than rural properties.
If you can’t find tenants right away, or when your first ones move out, you’re responsible for paying the bills. That includes your mortgage payments, Council Tax, utilities bills, and any leasehold payments.
Can you afford do to this for several months?
With the pandemic in mind, you’ll also need to plan for what you’d do if your tenants suddenly lost their income. Could you afford to provide a rent holiday? Negotiating with existing tenants is easier than trying to fill your property at a time when money is tight for many people.
Taxes may rise on buy to let properties in the near future, too. This could be in the form of additional tax on rental income, or on property itself. The future is unknown – all we do know is there’s a massive national debt due to coronavirus and the Government will need to claw it back somehow!
It’s not all doom and gloom, though. A buy to let investment now could set you up for an early retirement, or a more secure financial future. You’re buying an asset that can deliver great returns.
At the moment, even a rental yield of 3% is much higher than you’d get if your cash was sitting in a savings account. Even with mortgage interest rates to consider, you’re earning more than if you leave your money in the bank.
As the economy gets moving again the future, you’ll also have the option of selling your property for profit, too. Right now, house prices have spiked due to the announcement of the Stamp Duty Holiday – but an anticipated short-term slump means you could nab a great deal. Home sellers are in a pickle: mortgages are MUCH harder to get at the moment, so many sales are on hold.
If you can confirm your buy to let mortgage, or buy outright in cash, you’re in a strong position to negotiate a bargain price!
There’s so much to consider when you become a landlord that you need to do your research before committing. Read these articles next to help you decide if it’s the right investment move for you.